High Frequency Trading

February 2, 2010 at 12:29 am 2 comments

I just read an article that has caused me to stop and reflect. The article was about high frequency traders who, through the considerable power of high speed computers, trade millions of shares in what can be milliseconds. In one of the main forms of high frequency trading, the trader will capitalize on the difference on the price of a particular share that is traded in different markets. For example if a share is trading for $1.00 in New York but for $1.01 in Toronto, the trader will quickly buy large amounts of that share in New York and sell it in Toronto before that gap closes. $0.01 profit on each share of thousands or more shares traded done many times over the course of the day adds up. My concern is what is the point of this form of trading? Most high frequency traders use their own money or their own firm’s money, they don’t have clients in the traditional sense so the only one or ones who profit are the trader and/or the trader’s firm.

Stock markets were originally set up as places where companies could go to sell shares in themselves to investors in order to raise capital so those companies could further grow and develop and through that growth and development create jobs and provide a further base for taxes and, generally, better the economic condition of society as a whole. Today, much of what goes on in the different markets, is not about creating a more robust, stronger society through the improvement of companies looking for investors to help them grow. Now much of the activity in the market place is simply about making a profit for the banks, investment firms, and some investors with little or no regard for building up society through investing in companies to allow them to grow and in so doing make society a better place for us all. For much of our investment industry, it is now about profit for profit’s sake and if society is impoverished through this hunt for profits, well who cares? That’s what investing is all about, eh? The chase for profits with little or no regard for the society that provides the infrastructure for that profit chasing to take place.

The article on high frequency traders high lights this point I’m making. Such trading builds nothing for society as a whole; its sole purpose is profit only for the traders with no care whatsoever that that profit chasing could well have a negative impact in the long run on all of us. One of the problems around high frequency trading is that we don’t know what its long term effect on society (and the market place) will be. Its proponents say it can only do good – high frequency trading, they say, creates more liquidity (anyone can get an order filled quickly at the market price) and lessens the spread between the high price traditional brokers charge clients who want to buy and the low price those same brokers offer clients who want to sell . However, its critics say such trading could have the effect of blowing the markets up much like the more traditional trading in those toxic investments that precipitated the economic meltdown of 2008/2009. It makes me nervous that once again we, the public, are unwittingly riding the tail of an investment dragon that could well have a serious negative impact on our way of life. Where is the due diligence from both the investment industry’s supposed self-regulatory system and our government on how trading in such a risk filled manner is still, even as we are slowly recovering from the last economic disaster created in large part by a failure by all parties in their regulatory responsibilities, allowed to operate when the real consequences of that form of risky trading are not known?

Entry filed under: ethics, investments, Uncategorized. Tags: .

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2 Comments Add your own

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